Crowding Out Bites Back

Many economists, like James Galbraith here, have rightly dismissed arguments to the effect that deficit spending, especially in today’s highly peculiar circumstances, will result in decreased (or “crowd out”) domestic investment here in the US. But the Financial Times has an article today which features a complaint from Latin American former finance officials to the effect that such issuance, by hugely increasing the supply of safer debt backed by the US and developed country treasury departments, may well choke off the ability of poorer countries to issue debt. It’s a concern that deserves to be heard.

Economists warn on LatAm credit squeeze

By Stephen Fidler in London
Published: December 4 2008 18:07 | Last updated: December 4 2008 21:20

Huge volumes of US Treasury bonds issued as part of an effort to reverse an economic slump threaten to stop access to credit by Latin American governments facing financing needs of an estimated $250bn next year, a group of prominent economists from the region has warned.

The risk that Latin American and other emerging market borrowers may be “crowded out” from credit markets by a US fiscal deficit that could exceed $1,000bn next year has not been much emphasised in the scramble to save the US economy. But the economists said “powerful and innovative” new mechanisms were required to deal with the threat in order to direct money back into the region.

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